Nvidia (NVDA 6.18%) stock is hovering in the stratosphere on the heels of a massive investment curve by companies of all sizes in artificial intelligence (AI) technology. Wall Street analysts are understandably boosting their estimates and raising their near-term price targets.
Bank of America analysts raised their price target to $500 for Nvidia, while analysts at Robert W. Baird and Wedbush are not far behind, with estimates ranging from $475 to $490. The consensus analyst estimate calls for Nvidia's revenue to increase by 58% for the current fiscal year, before slowing to 27% next year.
However, IDC projects spending on AI-centric computing systems to increase by 27% annually through 2026.
Nvidia has already been growing faster than that estimate. Are analysts underestimating the company's potential? And if so, what does that mean for Nvidia's soaring share price?
More opportunities unfolding
At the recent Computex conference, Nvidia just completed an impressive round of new announcements. The partnerships the graphics specialist unveiled demonstrate why Nvidia will remain the leader in AI chips and should continue to deliver the goods in terms of revenue growth.
One of the more important developments is a collaboration with Japan's SoftBank Group to build a new platform for generative AI and the next generation of wireless connection speeds, including 5G and 6G. Softbank plans to roll out Nvidia's new GH200 Grace Hopper Superchip to its AI data centers. This will pave the way for Japan to begin rolling out AI-based wireless applications for consumers.
Nvidia said Google Cloud (part of Alphabet), Meta Platforms, and Amazon are also adopting the DGX GH200 platform, which will be used as a "blueprint for future hyperscale generative AI infrastructure."
Nvidia's data center division is booming and seems to be entering another wave of accelerating growth. Segment revenue was up 14% year over year in the fiscal 2024 first quarter (ended April 30), but management guided for total revenue to nearly double in the current quarter, based on accelerating demand in the data center space.
NVDA Revenue (Quarterly) data by YCharts
$1 trillion worth of opportunity
When a company is experiencing accelerating growth in an evolving market like AI, it's tough to pinpoint exactly how big of an opportunity this is going to be. In these scenarios, it's more likely analysts will underestimate a company's growth potential than overestimate it.
There are similarities between Nvidia and Amazon at the start of e-commerce in the 1990s. Amazon experienced strong growth, and the stock soared to very expensive valuation levels. But even an investor who patiently endured the 2000 market crash would have been richly rewarded over the next two decades.
Investors should never underestimate a company that is on a strong growth trajectory, especially one that is serving multitrillion-dollar industries with mission-critical technology.
AI-generative applications, like OpenAI's ChatGPT, are only the tip of the iceberg. Nvidia CEO Jensen Huang described the AI opportunity as "the reinvention of computing." Based on figures he provided in the last earnings call, he's not overselling it by any stretch.
There is $1 trillion worth of data center infrastructure in the world right now. But nearly all of these data centers are still using central processing units (CPUs), which are not as powerful as the GPUs needed to run AI applications. Data centers will, indeed, have to reinvent themselves for the future of computing. That is a growth opportunity of epic proportions for Nvidia.
Still, smart investors shouldn't get caught up in the AI frenzy. Sound investing requires slowing down and thinking through the return potential based on the price the market is already asking.
With the stock trading at its highest price-to-sales ratio in history, investors should be asking how much of Nvidia's future growth from AI is already baked into the stock price.
NVDA PS Ratio data by YCharts
Nvidia must meet high expectations to deliver returns
Wall Street analysts might be underestimating Nvidia's future growth, but I would be cautious about buying the stock at these highs, and not just because of the high valuation.
Investors also need to consider other risks that could cause the market to revalue Nvidia at a lower price-to-sales ratio. There are already questions being raised about the role of regulation in overseeing the use of AI, which could slow the growth and implementation of this technology. This could cause uncertainty and volatility for AI stocks.
Before buying Nvidia at these high prices, investors should consider less-expensive tech stocks, such as leading cloud service providers that stand to benefit from growing demand for AI services but trade at lower valuations.
